I <3 US Dollar

I've never written or spoken that phrase before. However, extreme times call for extreme measures!

With
the three ring circus unfolding in Washington DC regarding the debt
ceiling, it has been interesting to witness the degree of fear mongering
taking place. While national polls indicate that most people are
against the debt ceiling being raised, anecdotally our experience has
been that the entire "debate" has a lot of people freaking out. Anytime
we see people freaking out and markets responding in a non-confirming
way, along with underlying fundamentals moving in the opposite direction
as the people freaking out, then we look for opportunity to capitalize.
We see just such a situation at present with the US dollar, which is
why I've fallen in love.

I kid of course, as we try never to
project emotions on positions we've taken. However, we've been so
intensely bearish on the US dollar for so long that moving in the
opposite direction, if even for a trade (which this is), is enough to
alter my brain chemistry.

The circus surrounding the debt limit,
as well as the events unfolding in Europe, are a sideshow relative to
what we believe to be the major development unfolding - which is the
global economic slowdown. It is as if we were on a large oil tanker
which is starting to turn and everyone on the tanker is busy watching a
group of dolphins doing some weird masochistic tricks as the ship is
turning. What the dolphins are doing may be disturbing and create an
emotional response, but what really matters to the people on the boat is
the fact that the ship is turning.

While there may be more
theatrics to come as slimy politicians do what slimy politicians do, I
fully expect the debt ceiling to be handled, with the most likely
outcome achieving nothing. Even cuts of $1.5 trillion over 10 years is a
rounding error relative to ANNUAL deficits of that size or
larger. There are not enough rich people to raise enough taxes from to
close the gap generated by endless growth in entitlement and defense
spending. Both spending cuts and potential tax increases promise to be
somewhere out in the future in order to get slimy politicians
through the next election.

Fear and anxiety can cause people to
do interesting things so the next 3 weeks could be quite interesting.
However, after the dolphins are done with their sick games, markets will
be left confronting the fact that the economic ship is turning. The US
economy, following China which has been slowing for months, was one of
the first major economies to enter this slowing phase. Germany and many
other major economies are just beginning the process and markets aren't
really pricing that in yet, in my opinion. Interest rate differentials
may be poised to move in favor of the US dollar relative to market
expectations.

In addition to our fundamental and sentiment
driven argument for the US dollar, particularly versus the euro, is the
relative resiliency the US dollar has shown despite all the bad news and
negative sentiment. The following is a daily chart of the US dollar
index:

We
expect this base in pricing to resolve itself to the upside as markets
continue to price in the global economic slowdown, risk aversion
increases and interest rate differentials move in the US dollar's favor.

Most of our best ideas have been greeted by clients with
disgust and questioning. I chronicled the mistake we made with our
airline stock idea from several years ago in this blog a while back. Our
mistake in that instance was how we executed the idea rather than the
idea itself. I like to think we try to learn from our past mistakes and
have executed this idea with a diversified approach, though we do
believe the euro is particularly vulnerable. Because this position is
expected to be a short to intermediate term trade, we have a definitive
risk management gameplan in place, regardless of how high our conviction
level is.

Market Update

There
are a lot of cross currents at present: US debt ceiling, European debt
issues and we are just entering the meat of corporate earnings season.
Markets may remain very choppy as focus shifts minute to minute as
events unfold. We've typically done well in that kind of market
environment, as our trading activity increase to try and capitalize on
market swings. We've increased cash levels to provide ample liquidity,
which allows us to remain nimble and opportunistic. It would be foolish
for us to try and predict exactly how short term events will unfold
given all the cross current, which is why we remain focused on our
intermediate term outlook while trying using short term volatility to
our benefit.

Humor for the Weekend

If I were to propose to the US dollar, this would be how I would do it:

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